ESG Investing Is Missing From Most Retirement Plans

A new survey by NEPC, an investment consulting firm, finds that 88% of corporate defined benefit and defined contribution plan sponsors have not incorporated environmental, social and governance investing into their plans.

However, 29% of survey respondents said they were interested in doing so.

The poll found that among sponsors that have incorporated ESG, 70% were defined contribution plans, and 62% of these were health care focused organizations.

NEPC’s corporate and health care practices conducted the online survey in June among 69 respondents that offered 119 plans. Sixty-five percent of respondents were corporations, and 35% were health care institutions.

“The survey findings solidify our belief that institutional investors can capitalize on opportunities created by ESG as long as it makes sense for them,” Brad Smith, partner in NEPC’s corporate practice, said in a statement.

“Right now, for example, a big focus for DB plans is closing funding gaps, and while ESG may reduce risk over time, these plan sponsors often prioritize purely financial factors versus sustainability to drive excess returns.”

Smith said it made sense that health care would adopt ESG at a higher rate than its corporate counterparts because of the nature of the industry and the fact that a large proportion of those organizations are either mission-driven or faith-based.

“Many health care organizations have historically included a socially responsible investment option within their DC plan, which is likely the reason why the survey findings show more ESG adoption by DC plans than other plan types,” he said.

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Ninety-four percent of the defined benefit plans surveyed were not incorporating ESG at present, though 28% said they may do so in the future.

Fifty-nine percent cited long-term risk and return factors as their most important consideration when evaluating a potential investment. Thirty-nine percent said it was diversification.

“Plan sponsors that want to consider incorporating ESG should remember that the concept is rooted in strategy and process, not investment products,” NEPC senior consultant Kelly Regan said in the statement. “Important factors when heading down this path is to start with education, as well as evaluate if ESG is already part of their current investment manager lineup.”

Regan said plan sponsors may find that managers selected for financial reasons also incorporate material ESG factors into their investment process.

The defined benefit and defined contribution plan respondents that said they were not currently interested in ESG cited financial reasons as their rationale. Thirty-eight percent said they considered only financial factors in their portfolios, while 27% said they would need more data on ESG’s impact to performance.

More than eight in 10 of the plan sponsors surveyed that were not including ESG factors today said they had not been asked by defined contribution plan participants to consider incorporating ESG.

“Millennials are emerging as a generation that favors ESG relative to others, so as they become a larger part of DC programs, it’s not unreasonable to expect more requests for ESG-related investment options,” Smith said.

A recent poll showed that well-off younger Americans want to leave a socially responsible legacy.

“However,” Smith added, “there are many additional factors aside from participant demand that need to be considered when contemplating the addition of an ESG investment option to a DC plan — not the least of which is [Employee Retirement Income Security Act] guidance on the topic.”

A recent report said few retirement plans incorporate ESG because of lack of clear guidance from the U.S. Labor Department.